S&P 500; US Indexes Fundamental Analysis – Forecast for the Week of April 24, 2017

The major U.S. indexes rose last week at the start of the first-quarter earnings season, however geopolitical uncertainty continued to weigh on the price action, causing choppy, two-sided trading at times. Comments from U.S. officials, on the other hand, proved to be supportive.

At the end of the week, about 10% of S&P 500 companies had reported earnings. The industrial and financial services companies led the way last week, and the results were encouraging. As far as the industrial companies were concerned, some firms provided upbeat commentary about improving activity levels.

In the cash market, the Dow Jones Industrial Average closed the week at 20,547.76, up 0.5%. For the year, it’s up 4.0%. The benchmark S&P 500 Index settled at 2348.69, up 0.8%. It’s up 4.9% in 2017. The NASDAQ Composite finished at 5912.53, up 1.8%. This year, it’s up 9.8%.

Financial services companies showed improvement, benefitting from higher interest rates earlier in the year as profitability on traditional borrowing and lending showed early signs of improvement.

Although the indexes are down only slightly from all-time highs, they remain at lofty levels. According to current data, on a price-to-earnings basis, the S&P 500 recently traded at 17.4 times estimated 2017 earnings, reflecting a high level of optimism. The optimism is being fueled by the Trump Administration’s promises to reform taxes and healthcare, increase spending on infrastructure and relaxing regulations.

Given this information, in order for the markets to move higher, they are going to have to be supported by earnings growth as opposed to higher valuations. Investors are looking for 9% earnings growth in the first quarter, so anything less than that number may prove to be disappointing.

Forecast

Late in the week, stocks rallied after U.S. Treasury Secretary Mnuchin said the Trump Administration is close to bringing forward “major tax reform.” On Friday, President Donald Trump promised to make an announcement about much anticipated tax reform next week, but it was not immediately clear how much he would reveal or what form it would take.

“We’ll be having a big announcement on Wednesday having to do with tax reform. The process has begun long ago but it really formally begins on Wednesday,” Trump said at the Treasury Department on Friday.

The rally started in November 2016 on optimism about the Trump administration’s pro-growth policy changes. Recently, the price action in the market appeared to indicate that investors were becoming less convinced the new president can push through desired changes.

The direction of the markets this week may be determined by whether Trump delivers the goods on Wednesday.